ULIP- Unit Linked Insurance Plan

What are ULIPs?

Unit Linked Insurance Plans (ULIPs) are a type of financial product that combines investment and insurance benefits. When you invest in a ULIP, a part of your premium goes towards providing you with life insurance coverage, while the rest is invested in funds of your choice. This makes ULIP plans a unique investment option that can help you achieve your financial goals while also protecting your loved ones in case of an unforeseen event.

You hold the power to select from a diverse range of options – be it equity, debt, or a mix of both funds. 

ULIPs are popular because they offer flexibility to policyholders to choose and allocate funds according to their risk appetite and financial goals. Additionally, ULIPs offer tax benefits under the Income Tax Act, 1961.

What are the Features of ULIPs?

Key Features of ULIP

Feature 1

Provides a pool of funds plus life insurance

Feature 2

Daily NAV tracking & monthly factsheets for transparency

Feature 3

Flexibility with top-up and fund switching options

Feature 4

Tax benefits under Section 80C & 10 (10D)*

Feature 5

Diverse asset classes available like equity, debt, balanced, MMI, etc.

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(*Tax benefits for investments up to ₹2.5 Lacs/year)

Here are the features of ULIPs:

• Dual Benefit: With ULIPs, you get the dual advantage of insurance and investment. While a portion of your premium ensures you're covered with life insurance, the other part is invested in various funds of your choice.

• Flexibility: You have the freedom to switch between funds based on your risk appetite and market conditions. Whether you're a conservative investor or someone who loves to take risks, ULIPs offer a range of funds to suit your style.

• Transparency: You always know where your money is going. Detailed statements show you the charges applied, the amount invested, and the insurance coverage you have.

• Liquidity: After the initial lock-in period, which is 5 years, you can make partial withdrawals to meet any unforeseen financial needs.

• Tax Benefits: Investing in ULIPs can help you avail tax deductions under Section 80C of the Income Tax Act. Additionally, the maturity proceeds you receive are tax-free under Section 10(10D).

• Long-Term Investment: ULIPs encourage you to think long-term. With benefits that compound over the years, you're incentivized to stay invested and watch your wealth grow.

• Top-Up Facility: Got some extra cash? You can invest it in your ULIP through the top-up facility, enhancing your fund value and potential returns.

• Life Cover: Your loved ones are always protected. In the unfortunate event of your demise, they will receive the sum assured or the fund value, whichever is higher.

• Performance Tracking: ULIPs allow you to monitor the performance of your investments. You can see how your funds are doing and make informed decisions about switching or staying.

What are the Benefits of the Unit Linked Insurance Plan?

What are the Types of ULIP Plans?

Classification by Death Benefits: Unit Linked Insurance Plans can also be categorized on different criteria or norms. For instance, ULIPs are categorized into two broad categories depending on the death benefit. Type 1 and Type 2 ULIPs. 

What Type of Funds Do ULIP Plans Include?

Common types of funds available with their risk characteristics are:

• Large Cap Funds: These ULIP funds primarily invest in stocks of well-established and financially stable large-cap companies that are in the Top 100 companies.  For example, Nifty 50 stocks.

• Mid Cap Funds: Mid Cap ULIP funds invest in stocks of medium-sized companies with the objective of generating higher returns than large-cap funds, albeit with relatively higher risks due to the smaller size of the companies.

• Debt Funds: Debt ULIP funds predominantly invest in fixed-income securities such as government bonds, corporate bonds, and debentures, aiming for stable income generation and capital preservation, making them less volatile than equity funds.

• Balanced Funds: Balanced ULIP funds strike a balance between equity and debt investments, providing potential for capital appreciation through equity allocation while offering stability and income generation through debt allocation, suitable for investors seeking a moderate risk-reward profile.

How Does ULIP Work?

In order to understand the working of ULIP plans, here’s an example:

Akash, a 30-year-old man, invests in a Unit Linked Insurance Plan for 20 years. He pays a yearly premium of Rs. 50,000 for 10 years. 

Policy Details:

Initial Sum Assured = Rs. 5,00,000 (yearly premium x 10)
Annual Administration and other charges = Rs. 2500
Total Annual Investment = Rs. 47,500
Initial NAV Value = Rs. 10
Units purchased = (47500/10) = 4750

Final ULIP Returns:

Who Should Invest in ULIPs?

ULIPs vs Mutual Fund

Let’s look at the detailed comparison between ULIP vs Mutual Funds:

How To Buy a ULIP Plan Through Policybazaar?

What is a ULIP Calculator?

A ULIP calculator is an online tool that helps investors calculate their premium payments and expected returns based on their investment horizon, risk, and financial goals. The calculator takes into account various factors, such as

• Amount you wish to invest (monthly/yearly/one-time)

• Policy tenure (for which you wish to stay invested)

• Periodic investment period (for which you wish to pay premiums)

• Expected rate of return

By entering these specifics, the investors can analyze projected investment growth overall and choose a preferred plan.

What are the ULIP Charges? 

What is ULIP NAV?

ULIP NAV stands for Net Asset Value of Unit Linked Insurance Plan. It is the value of a single unit of a ULIP fund. ULIP NAV is calculated by dividing the total value of the fund's assets by the number of outstanding units.

ULIP NAV is important because it determines the value of your investment. When you invest in a ULIP, you buy units at the current NAV. The value of your investment will increase or decrease depending on the performance of the fund and the changes in the NAV.

ULIP NAV is calculated and published daily by the insurance company. You can find the NAV of your ULIP fund on the insurance company's website or in the fund's fact sheet.

What are the Myths about ULIP Investment?

Many myths surround Unit Linked Insurance Plans. Let us debunk some of the common myths of a ULIP plan:

Myth 1: ULIPs are risky financial instruments 

Reality: ULIP plans are a combination of part investment and part insurance. Since investors can choose if they want to invest in debt, equity, or a combination of both, the investment risk varies for all. Equity-linked funds are the riskiest of all but offer the highest returns.

Myth 2: ULIPs are expensive due to high charges

Reality: ULIPs have very low charges. The new age ULIPs come with features like Zero Premium  Allocation & admin charges.

Myth 3: ULIPs mandate continuation

Reality: Investors can discontinue a ULIP plan after a 5-years lock-in period without any surrender charges. While not mandatory, it is in the best interest to continue investing in ULIPs after 5-years as it helps accumulate a higher corpus in the long run.

Myth 4: Market volatility reduces life cover 

Reality: The life cover remains unchanged despite market fluctuations. If the insured passes away during the policy term, ULIP plans pay either the complete life cover or the fund value, whichever is higher.

What are New Age ULIPs?

New-age ULIPs are a new generation of Unit Linked Insurance Plans that offer a number of advantages over traditional ULIPs. These plans are more flexible, transparent, and cost-effective, making them a more attractive option for investors.

Some of the key features of new-age ULIPs include:

• Lower charges: New-age ULIPs have lower charges than traditional ULIPs, such as premium allocation charges, fund management charges, and policy administration charges. This can result in higher returns for investors over the long term.

• Greater flexibility: New-age ULIPs offer greater flexibility in terms of investment options, fund switching, and partial withdrawals. This allows investors to tailor their investment strategy to their individual needs and risk appetite.

• Enhanced transparency: New-age ULIPs offer enhanced transparency in terms of fund performance and investment costs. This helps investors make informed decisions about their investments.

Overall, new-age ULIPs offer a number of advantages over traditional ULIPs. Investors looking for a flexible, transparent, and cost-effective investment option should consider investing in a new-age ULIP.

Conclusion

ULIPs, blending insurance and investment, offer a unique financial solution for those seeking dual benefits. While they provide the security of life coverage, their investment component allows for potential wealth accumulation. In the ever-evolving financial landscape, ULIPs remain a noteworthy option for informed investors.